Cutting Taxes in a Recession

Like it or not, grocery sales tax essential source of stability in state tax structure

Frank Cagle

11:40 AM, Jan 18, 2012

It's an election year so expect the Legislature to at least talk about cutting taxes. This might seem odd in the middle of a recession (remember the crisis last year to pass a balanced budget?) but the state Legislature is likely to cut something, even if it just nibbles around the margins.

House Republicans are pushing for action on cutting state inheritance taxes. House Democrats propose to cut the sales tax on groceries. Gov. Bill Haslam has put both into his legislative package for this session.

I'm sure there are Democratic legislators who are genuine in their desire to cut the sales tax on groceries, but pardon me if I'm a bit skeptical. The Democrats were in charge of the House and Senate for 100 years and could have cut the sales tax on groceries any time they wanted. Indeed, given that they were in control, the current sales taxes on food would not be there had not the Democrats voted for it.

It is also on the Republican governor and the Republican majorities in the Senate and House to pass a balanced budget, so the Democrats have no downside in advocating a tax cut. A cut in the sales tax on groceries is a convenient contrast with the Republican plan to cut taxes on people wealthy enough to have an estate worth more than a million dollars. It's a great election year issue.

Haslam had earlier raised a concern about cutting the "death taxes" because of budget concerns but he got the message from House conservatives that they were determined to use their majority to do something. A compromise has been reached in which the amount of the estate that will be taxed will be raised $1 million a year until it reaches $5 million over a period of years. Phased in over four or five years, it will not have a significant impact on the multi-billion dollar budget.

Republicans argue that the estate tax needs to be reduced to prevent Tennessee business people and property owners liquidating and moving to Florida when they retire. They also want to encourage wealthy retirees from elsewhere to settle in Tennessee. Call it the Tellico Village incentive.

A lot of estates consist of farms and small businesses. If your parents had a small business in a good location, the property alone might be worth more than a million; but the store might not generate enough money to pay state and federal taxes, forcing the sale of the business. This has happened over and over when it comes to family farms. With valuations as a potential subdivision, the children can't pay the taxes and the farm has to be sold for development rather than kept in the family.

It's hard to say whether Haslam is going to push for the reduction in sales tax on groceries as the Democrats propose. It may be a bargaining chip that gets lost along the way.

States around the country that have income taxes and sales taxes and bigger budgets are facing staggering debt, budget deficits, and pension nightmares. Tennessee is a well-managed state. The debt is less than any other state.

The principle source of general taxes is the sales tax, which disproportionately impacts the poor, who spend a higher percentage of their income each month than the well-to-do. You can argue that this is unfair, you can argue that if the state had more revenue we could spend more on education and social programs. But the taxpayers have been fairly clear over the recent decade that they prefer lower taxes and fewer services. That's the structure we have.

We should be careful about cutting the sales tax on groceries no matter how good it sounds. Because in times of recession people may stop buying boats and camcorders—but they have to buy groceries every week. It is a staple of the tax structure and it is a big reason state revenues have exceeded expectations for the last year.

You may not like sales taxes on groceries, but the alternative is higher taxes elsewhere or cuts in funding for education and other needs. It's the most reliable source of state revenue.